US embassy cable - 05BRASILIA2242

UNCLAS SECTION 01 OF 02 BRASILIA 002242 
 
SIPDIS 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
AID/W FOR LAC/SA 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, EFIN, Macroeconomics & Financial 
SUBJECT:  More on Corruption Allegations Against FinMin 
Palocci;  Speculation Rampant But no Hard Evidence 
Demonstrating the Minister's Personal Involvement 
 
REF:  A) Brasilia 2237 
 
1. (U)  Summary and Introduction.  Over the August 20-21 
weekend, the surprise August 19 corruption allegations 
(reftel) leveled at Finance Minister Palocci continued to 
reverberate through the Brazilian body politic.  In an 
August 21 press conference, Palocci emphatically denied the 
charges made by his ex-advisor Rogerio Buratti - to the 
effect that kickbacks from trash collection concessions were 
funneled to PT campaign coffers.  Meanwhile, President Lula 
publicly defended the Finance Minister, adding that unnamed 
members of the opposition were trying to destroy his 
administration. 
 
2.  (U) For their part, Sao Paulo state prosecutors 
acknowledged that, outside of Buratti's written deposition, 
they do not have any documentary evidence against Palocci. 
However, the August 20 "O Estado de Sao Paulo" reported that 
it had obtained audiotapes made by federal investigators 
between February and September 2004 in which Buratti 
intimates that he will seek out the Minister's Chief of 
Staff and Personal Secretary (all three alumni from 
Palocci's mayoral administration) to help direct a contract 
to Buratti's firm.  End Summary and Introduction. 
 
The GOB Responds 
---------------- 
 
3.  (SBU) Neither Palocci nor the Ministry of Finance is 
taking the charges leveled at the Minister laying down.  On 
Sunday, August 21, the Minister held a two-hour press 
conference, following up on his August 19 written statement, 
in which he denied that he had done anything wrong.  Palocci 
performed well during that session, anwering all questions 
posed to him and generally earning the plaudits of 
commentators and analysts here.  With respect to the 
specific allegations against him, Palocci noted that the 
trash collection contract in question had actually been 
signed in between his two terms (1993-1997 and 2001-2003) as 
Mayor of Ribeirao Preto (SP).  He said that prior to the 
press conference he had spoken with Lula by telephone and 
offered to step aside - but that the President had made 
clear that he wanted Palocci to remain as Minister.  (In an 
August 22 morning radio address, Lula publicly affirmed that 
he had insisted that Palocci stay.) Nevertheless, Palocci 
emphasized that he was not irreplaceable and that the 
continuation of the GOB's sound economic policies does not 
depend upon his continued presence in the government.  The 
markets, he declared, knew how to distinguish between 
economic fundamentals and the political process, and the 
anxiety in the market on (Friday) August 19 was due to the 
way the allegations were made public and not any 
disequilibrium within the economy.  Finally, Palocci 
guaranteed that Buratti's charges would not disrupt the 
ongoing work of the Finance Ministry. 
 
4.  (SBU) Concurrently, high-level members of the GOB's 
economic team have been reaching out to investors in an 
attempt to help calm market jitters.  President Lula told a 
group of industrial leaders in Sao Paulo that come what may, 
he would not alter the course of the administration's macro- 
economic policies.  PT President Tarso Genro took much the 
same line, calling the allegations against Palocci 
"delirium."  Others, however, within PT circles hedged their 
bets a bit more.  Party Secretary General Ricardo Berzoini 
labeled the charges as "silly ones," and stated that the 
market was sufficiently mature so as to withstand any change 
in command at the Finance Ministry - should this prove 
necessary. 
 
The Case For and Against Palocci 
-------------------------------- 
 
5.  (U) On August 20, federal prosecutor Aroldo Costa Filho 
briefed the press on the results of investigators' search of 
Buratti's place of business.  According to Costa, law 
enforcement authorities did not find any documents linking 
Palocci to impropriety, but did uncover some documents 
indicating that the kickbacks alleged by Buratti may have 
occurred. 
 
6.  (SBU) While Palocci's personal involvement (or lack 
thereof) is still not proven, circumstantial evidence is 
mounting that the trash collection contracts may indeed have 
been dirty.  Specifically, Buratti, the Secretary of 
Government when Palocci was Mayor in Ribeirao Preto, left 
that post in 1999 to join the trash collection firm Leao and 
Leao, and irregularities in the award of such contracts in 
other cities governed by PT mayors (Santo Andre, under the 
administration of the late Celso Daniel, and Sao Paulo, 
under Marta Suplicy) have since come to light.  In addition, 
the August 20 "O Estado de Sao Paulo" reported that it had 
obtained audiotapes made by federal investigators between 
February and September 2004 in which Buratti intimates that 
he will seek out the Minister's Chief of Staff and Personal 
Secretary, all three alumni from Palocci's mayoral 
 
SIPDIS 
administration, to help direct a contract to Buratti's firm. 
While this is not proof that either of Palocci's aides (or 
Palocci himself) did anything wrong, it is one more 
allegation coming at a very inopportune time for the 
Minister. 
 
7.  (SBU) At this point it's unclear where all this will 
lead.  Palocci has stated that he expected to be called to 
testify to appear in front of one of the congressional 
investigative committees currently looking into influence 
peddling allegations.  Meanwhile, prosecutors might seek to 
gain access to Palocci's bank records in an attempt to 
verify Buratti's story. 
 
August 22 Market Reaction 
------------------------- 
 
8. (SBU) The markets appear to be giving Palocci the benefit 
of the doubt:  the Real appreciated 1.6 percent immediately 
upon the market's opening on Monday (from 2.45 to the dollar 
to 2.40) before depreciating slightly to 2.41 to the dollar. 
The Sao Paulo stock exchange (BOVESPA) was up 1.68 percent 
in morning trading.  A CSFB chief economist, in a 
conversation with Econoff the morning of August 22, 
attributed this to Palocci's weekend press conference and 
the absence of evidence corroborating Buratti's allegations. 
He did not expect, however, that the Real would make up all 
of the ground it at lost on Friday August 19 due to the 
additional uncertainty that the allegations had introduced. 
The CSFB economist noted that while Palocci had more 
personal credibility than some of the other players in this 
drama, that the markets would nevertheless be watching for a 
repetition of a pattern that has been replayed repeatedly 
during the scandal:  first an allegation is made which the 
accused denies categorically, but then new evidence comes to 
light confirming the accusations. 
 
DANILOVICH